Does Oregon Tax Overtime in 2026?
No - Oregon does not tax qualifying overtime premium pay under the OBBBA deduction in 2026. Oregon uses rolling IRC conformity, and the 2025 OR-40 instructions explicitly cite the overtime deduction as allowable on Oregon returns. The overtime deduction (IRC §225, up to $12,500 single / $25,000 MFJ) reduces federal AGI, flowing through to reduce Oregon taxable income. With Oregon’s graduated rates reaching 9.9%, overtime workers can save approximately $1093.75 or more in Oregon state tax when claiming the full deduction in the 8.75% bracket.
How Oregon's Overtime Tax Treatment Works
Oregon conforms to the OBBBA overtime deduction through its rolling IRC conformity for changes to the definition of federal taxable income. The 2025 OR-40 instructions explicitly confirm this, stating: "New federal deductions. You may be able to claim the same deductions for tip income, overtime wages, and passenger vehicle loan interest that you are claiming on your federal return." This is one of the clearest state-level confirmations of OBBBA conformity.
Oregon’s income tax starts from federal adjusted gross income (AGI), then applies Oregon-specific modifications. The OBBBA overtime deduction is an above-the-line deduction reported on federal Schedule 1-A - it reduces federal AGI before Oregon’s computation begins. The deduction is already embedded in Oregon’s starting figure.
An important distinction for overtime: only the premium portion of overtime pay is deductible, not the total overtime wage. For a worker earning time-and-a-half, only the 0.5x premium above the regular rate qualifies. Oregon does not modify this federal rule - the same premium-only limitation applies for both federal and Oregon tax purposes.
Oregon’s graduated rate structure makes the state tax savings particularly significant. With rates reaching 8.75% for income between $11,400 and $125,000 (single), and 9.9% above $125,000, Oregon overtime workers receive proportionally larger state tax savings compared to flat-rate or lower-rate states.
Federal Overtime Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §225 (OBBBA) |
| Maximum deduction | $12,500 overtime ($25,000 MFJ) |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Oregon treatment | Conforms |
| What qualifies? | Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees |
Worked Examples Comparing Federal and Oregon Treatment
Example 1: Warehouse worker with $50,000 income and $8,000 in overtime premium (single filer, 12% federal bracket)
Qualifying overtime premium: $8,000
Overtime deduction claimed: $8,000 (capped at $12,500)
Estimated federal tax savings: $960.00
Oregon return:
State tax savings from deduction: $700.00
Oregon’s graduated rates mean this worker’s $50,000 total income falls in the 8.75% bracket ($11,400 - $125,000 for single filers). The $8,000 overtime deduction reduces Oregon taxable income within this bracket, saving approximately $700.00 in Oregon state tax. Oregon’s high marginal rates make the state savings much larger than in flat-rate states.
Example 2: Nurse with $80,000 income and $12,500 in overtime premium (single filer, 22% federal bracket)
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00
Oregon return:
State tax savings from deduction: $1,093.75
This nurse claims the full $12,500 single-filer cap. At Oregon’s 8.75% marginal rate, the state savings is approximately $1093.75. The 2025 OR-40 instructions explicitly cite OBBBA deductions, including overtime wages, as allowable on Oregon returns.
Oregon-Specific Rules for Overtime Workers
High marginal rates - large state savings: Oregon’s 8.75% bracket covers a wide income range ($11,400 - $125,000 for single filers), meaning most overtime workers benefit at this rate. At 8.75%, a worker claiming the full $12,500 deduction saves approximately $1093.75 in Oregon income tax. Workers with income above $125,000 benefit at the even higher 9.9% rate.
Paid Leave Oregon payroll tax: Oregon imposes a payroll tax through Paid Leave Oregon. The employee share is 0.6% of gross wages with no wage cap. This tax applies to overtime wages (including the premium) regardless of the OBBBA deduction. Combined with federal FICA, Oregon overtime workers face 6.2% + 1.45% + 0.6% = 8.25% in payroll taxes on all overtime pay.
Oregon Statewide Transit Tax: Oregon’s Statewide Transit Tax (STT) is a separate 0.1% tax on wages. This payroll-style tax applies to overtime wages and is not affected by the OBBBA overtime deduction.
No sales tax offset: Oregon has no sales tax, so the overtime deduction represents a pure income tax benefit. Oregon overtime workers keep more of their deduction benefit compared to states where higher take-home pay faces sales tax.
Oregon overtime laws: Oregon’s overtime rules generally mirror the FLSA (time-and-a-half after 40 hours/week) but include additional protections for manufacturing workers (time-and-a-half after 10 hours/day). The OBBBA deduction applies to the premium portion regardless of whether overtime is triggered by federal or Oregon law.
Related Tools
- No Tax on Overtime Calculator - calculate your federal overtime deduction
- Oregon Tax Guide - full state tax overview
- Oregon Paycheck Calculator
- Does Oregon Tax Tips?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map